How do transfer payments function as negative taxes?

Question

What will be an ideal response?

Answer 1

Transfer payments intervene between gross domestic product (Y) and disposable income (DI) in precisely the opposite way from income taxes. They add to earned income rather than subtract from it. Specifically, starting with the wages, interest, rents, and profits that constitute national income, we subtract income taxes to calculate disposable income. We do so because these taxes represent the portion of incomes that consumers earn but never receive. But then we must add transfer payments because they represent sources of income that are received although they were not earned in the process of production. Thus transfer payments function basically as negative taxes.